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  • Writer's pictureUmbrella Search

Is it better to be paid through PAYE or umbrella?

For contractors facing the choice between operating under an umbrella company or opting for PAYE (Pay As You Earn), the decision is crucial and can influence a range of factors, from the nature of contracts accessible to them to their eligibility for employment benefits.

To assist contractors in navigating this critical decision, Umbrella Search has compiled a comprehensive guide. This guide aims to explore the advantages and disadvantages of receiving payments through an umbrella company, providing essential insights to help contractors determine the best payment structure for their needs.

PAYE vs Umbrella

When contractors decide between a PAYE agency and an umbrella company, the choice significantly impacts various aspects of their professional life, including their contracts and eligibility for employment benefits.

In a nutshell, a PAYE agency employs the contractor, assigning contracts, paying fees, and handling tax and National Insurance deductions in accordance with UK PAYE tax regulations.

In contrast, an umbrella company not only employs the contractor but also offers a range of additional services and benefits as the contractor's official employer.

Choosing between PAYE and an umbrella company affects contractors' take-home pay and benefits. Both options operate under the PAYE system, so tax levels remain consistent. However, differences in statutory rights, expense processing, and tax codes present notable considerations.

Statutory Rights Covered

As employees, contractors working under an umbrella gain entitlements to statutory employment benefits. These include:

  • Sick Pay: They can receive payment if they are too ill to work, ensuring financial stability during health-related absences.

  • Holiday Pay: Contractors accrue holiday pay, which they can claim during their time off, ensuring they have paid vacations.

  • Maternity/Paternity Leave: If applicable, they are entitled to maternity or paternity leave, offering them paid time off to care for their new child.

  • Workplace Pension: They have the right to be enrolled in a workplace pension scheme, with contributions from the umbrella company, aiding their long-term financial security.

Processing Expenses is Easy 

  1. Reclaiming Expenses: Contractors working under an umbrella company can claim back certain work-related expenses. These might include travel costs, accommodation expenses if working away from home, professional subscriptions, and equipment necessary for their role. The specifics of what can be claimed can vary based on the umbrella company's policies and current tax laws.

  2. Reducing Taxable Income: By reclaiming these expenses, contractors effectively reduce their taxable income. This is because the reimbursed expenses are not subject to income tax or National Insurance contributions, leading to a lower overall tax burden.

  3. Compliance and Restrictions: It's important to note that the ability to claim these expenses is heavily regulated. Umbrella companies must comply with HMRC (Her Majesty's Revenue and Customs) guidelines, and only legitimate work-related expenses are eligible for reimbursement. Additionally, changes in tax laws, such as the introduction of the Off-Payroll working rules (IR35) in the private sector, have tightened the rules around what expenses can be claimed, particularly for those deemed to be working in a manner similar to employees.

What is an umbrella company?

Tax Codes Simplified 

  • Single Tax Code: One of the significant benefits of working through an umbrella company is the continuity of employment under a single employer (the umbrella company), which means contractors operate under a single tax code throughout their engagements. This continuity simplifies tax affairs, making it easier to manage and predict income tax and National Insurance contributions.

  • Simplified Tax Affairs: The umbrella company handles all the PAYE obligations, including tax and National Insurance deductions. Contractors receive a net pay after these deductions, streamlining their financial management and reducing the administrative burden associated with tax returns.

  • Less Paperwork: Since the umbrella company consolidates all earnings and deductions under one employment, contractors deal with less paperwork and fewer complexities at the end of the tax year, such as when claiming tax refunds or dealing with HMRC inquiries.

Are there any other benefits to contracting through an umbrella company?

Many contractors are considering switching from PAYE to umbrella and assessing how this decision can impact their earnings. Umbrella company contractors have the advantage of a single employment run, which allows them to offset their expenses against their tax bill and receive statutory payments during periods of unemployment. This can lead to significant savings compared to PAYE agency contractors who do not have access to these benefits.

Additionally, there are several more advantages for contractors who opt to work through an umbrella company, further enriching their contracting experience.

One significant perk of partnering with an umbrella company is the ease and simplicity it brings to the contracting process. The umbrella company shoulders the burden of many time-consuming and often complex tasks on behalf of the contractor. These tasks include invoicing clients, following up on payments, managing expense claims, handling administrative duties, and arranging necessary insurance coverage. This delegation of responsibilities can liberate a considerable amount of time and energy for contractors, enabling them to focus more on their professional growth and less on the administrative overhead that comes with contracting.

Moreover, an umbrella company provides contractors with the autonomy to select their projects, choose their clients, and determine their work schedule. This level of independence contrasts sharply with the situation of PAYE agency contractors, who have their assignments and schedules dictated by the agency. This autonomy is a critical advantage for many contractors, as it offers them the control and flexibility to steer their careers in their desired direction. By having the liberty to pursue the contracts and clients that align with their career objectives and personal preferences, umbrella company contractors can tailor their work life to suit their preferences, thereby potentially accelerating their professional development.

If you're leaning towards partnering with an umbrella company, the next step is selecting the right one for your needs. This is where Umbrella Search steps in to streamline the process.

At Umbrella Search, we simplify the search for your perfect umbrella company match and can offer offer detailed insights into your potential take-home pay with each umbrella company, including a breakdown of salary, tax, National Insurance, and pension contributions in a clear payslip format.

Whether your priorities include optimising for childcare credits or maximising your take-home pay, our service is designed to help you identify the most suitable umbrella company for your circumstances.

To embark on the journey to finding your ideal umbrella company partner, simply get in touch with us today. 

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